As the coronavirus outbreak continues to take hold of the world, the tremors are being felt in many facets of the global economy. In the past days many global markets posted large contractions and gold, the traditional safe-haven commodity, soared. It is noteworthy that although many of the Liv-Ex indices have posted a small loss, when compared to the other indices mentioned, the downturn is miniscule and as we have previously discussed, they are not necessarily representative of the investment grade market.

A feature fine wine has historically displayed is its resilience in the face of economic downturn. A carefully curated wine portfolio has proven an invaluable tool to investors looking to shield capital from more volatile conventional markets. To put this into perspective, a plot can be seen below which displays the performance of our proprietary baskets of top wines from specific regions (the components of which can also be seen below) against the FTSE 100 since the 2016 EU referendum.

Market Update January & February 2020 1

Market Update January & February 2020 2

Burgundy has experienced unparalleled performance in recent years, gaining 106.60% across the basket. What makes this growth more impressive is the stuttering observed in many sections of the UK economy over the same period. Although the growth seen in Burgundy is clearly an outlier, we view the region as one to continue buying in 2020, not only due to the recent gains from the vintage, but because they have been achieved with a low relative volatility.
Champagne has seen a continuation of its recent success throughout the plot. With demand buoyed on by the release of the 2008 banner vintage. Since the referendum, the tracked similar movements to the FTSE 100 for 8 months and then broke away, since then it has continued its trajectory and ends the term as the third best performing region with a gain of 50.42%.

The wines of the Rhone basket have enjoyed a 58.61% growth since the referendum. This has certainly been bolstered by three banner vintages releasing consecutively. 2015, 2016 and 2017 are all held in high regard for the Rhone. This has likely caused an uptick in trading of back vintages and sparked more interest for the recently concluded 2018 En Primeur campaign.

Bordeaux has historically shown itself to be the closest equivalent to conventional markets within the wine investment sphere. It is therefore no surprise that of the regions in the chart, it follows the movements of the FTSE 100 the closest. There are periods of divergence between the two, but this can mostly be attributed to increased volatility in the FTSE 100 or macro factors impacting the Bordeaux market such as the uptick seen in Q4 of 2018, likely caused by the annual increase in Bordeaux buying for Chinese New Year. It has been our view for some time that there is an ongoing flattening of the Bordeaux market. The gains posted from the five First Growth’s over the period is 16.12%. Although this is still excellent returns considering the climate, it is the smallest appreciation found across the regions. The perceived reasons behind this are a takeback of prices inflated by a depreciated GBP in the wake of the Brexit vote, the protests in Hong Kong also have an amplified impact on the Bordeaux market due to the Asian market typically favouring the region and more recently the US tariffs introduced on French wines. The emergence of the coronavirus will likely throw more cold water on China’s demand for Bordeaux in the coming months so we anticipate the period of stifled growth to continue in 2020.

From June 2016 to November, the Italian basket tracked the movement of the Bordeaux First Growths fairly closely. However, in Q4 of 2018, Italy begins to drift upwards. This has caused the basket to end the period 32.83% up. In the broader spectrum of the Liv-Ex indices, Italy is also successfully weathering the storm and is the only Liv-Ex indices in 2020 to post positive gains (0.56%) to date. This is a continuation of the growth seen in 2019 from the region which posted 0.39% average monthly growth last year, equating to a close of the year 4.70% up.

01/01/20 – 29/02/20

Index

Perf

Italy 100

0.56%

Liv-Ex 100

0.00%

Champagne 50

-0.21%

Rhone 100

-0.41%

Bordeaux 500

-0.97%

Burgundy 150

-2.53%

S&P 500

-8.56%

Nikkei 225

-10.63%

Dow Jones IA

-10.94%

FTSE 100

-12.75%

The US decision to withhold the suggested 100% EU tariffs for at least six months has caused an uptake in trading from the US. This could spur on the market somewhat and help shake off the cobwebs, at least in the short term, as merchants and collectors alike will look to fill their cellars whilst they can avoid even steeper tariffs. The Liv-Ex 100 has grown 0.22% in February, eclipsing the average 0.25% monthly contraction seen in 2019. Liv-Ex believe this growth is spurred on by the US tariff free regions of Italy and Champagne, with Bordeaux and Burgundy continuing to drift.

Another impact the coronavirus may have on the fine wine market is the possible postponing of this year’s Bordeaux En Primeur campaign, as the virus picks up pace across Europe. If the release of the 2019 vintage is delayed, this will likely result in the Place de Bordeaux countering the shortfall in revenue by releasing more physical stock to the market. This would inevitably cause downward pressure on the Bordeaux market and could cause further price contractions.

Over the same period since the EU referendum, the region-specific indices have demonstrated varying levels of correlation to the FTSE 100. As we have previously surmised, Bordeaux demonstrates the highest correlation to the fluctuations in the FTSE 100. Burgundy, Champagne, Rhone and Italy show themselves to be lower, but still positively correlated. One thing that should be considered is the slight delay macro factors have on influencing pricing in the fine wine market.

Correlation with FTSE 100

Bordeaux Basket

0.26

Burgundy Basket

0.19

Champagne Basket

0.16

Rhone Basket

0.14

Italy Basket

0.14

The Risk vs Reward plot that can be seen below is testament to the below average risk and above average returns historically found in the fine wine market. All fine wine indices are clustered (in the red rectangle) towards the lower end of the X axis, demonstrating a lower comparable risk alongside an attractive CAGR shown on the Y axis. This is one of many characteristics of fine wine that has consistently made it a favoured commodity for astute investors to place their capital in.

Market Update January & February 2020 5

EU/UK trade negotiations have now officially begun, so turbulence in FX will likely ensue. How the negotiations translate to the fine wine market remains to be seen, but our outlook remains unchanged. Any slump in FX will likely spur on buyers from overseas looking to take advantage of their new found buying power. Considering the current climate and 2019s performance, we see Bordeaux as largely fully priced for investment in 2020 and will remain bearish in at least the near future; although the impact of this year’s En Primeur campaign is unknown. It is rumoured to be another excellent vintage so competitive pricing may breathe some new life into the region.

Moreover, looking at the historical plot, the macro events in Asia and the higher correlation Bordeaux demonstrates to conventional markets, the recent downturn could be an indicator of the start of a period of stifled participation from Asia. The Super Tuscan wines, Rhone, Burgundy and Champagne remain our strong recommendations in the year ahead, for those looking to bolster their investment. However, it is our opinion that fine wine overall continues to be a firm stock picker’s market and broad regional buying tactics remain unwise. Moreover, whilst panic is setting in and many global indices are posting record losses, those with a position in fine wine should gain confidence when looking back at historical performance in time of adversity. The low correlation the commodity typically possesses to conventional markets and the recent performance of regions such as Italy, Burgundy, Champagne and Rhone mean that fine wine is well prepared to act as a port in a storm.